CorporateBondProductsandDerivatives.PPTVIP

Corporate Bond Productsand Derivatives APEC Finance and Development Program Frank Kwong Director Asia Credit Trading Contents Introduction The Building Blocks Anatomy of a Bond Asset Swaps Default Swaps Total Return Swaps Credit Linked Notes Repackaging Introduction What Are Credit Derivatives? Credit derivative returns are tied to the performance of a credit risk related measure. These include: default by a counterparty credit spreads related to a reference asset Like other derivatives, credit derivatives allow for the isolation and transfer of a particular type of risk - in this case, credit risk The basic products in the credit derivative market are: Asset Swaps Credit Default Swaps Total Return Swaps By combining these with technologies like repackaging and securitization, tailor made products and risk management solutions are possible Credit Derivatives - New and Not New Although credit derivatives traded under ISDA documentation are relatively new, similar products have existed in the commercial banking world for decades: Market Participants Banks are the largest buyers and sellers of credit protection, accounting for over 50% of market volume Insurance companies are expected to become more active in order to improve returns on capital Mutual funds and corporations are beginning to view credit derivatives as hedging instruments and/or attractive investment alternatives, particularly in high yield and emerging markets Why Use Credit Derivative Products? Creating Access Tailor credit, maturity, duration, currency and convexity exposures Provide greater yield than available “cash” alternatives Limit or reduce credit or default exposures (i.e., buy protection) Provide leverage (if desired) Diversify simply into new asset classes Create insurance products through Credit Default Swaps Hedge Portfolios of Credits Building Blocks Building Blocks Anatomy of a Bond Asset Swaps Cross Currency Asset Swaps Credit Default Swaps Total Return Swaps Building Block